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60 Blyth, Globalization and the Limits of Democratic Choice ipg 3/2003

uch contemporary analysis of the limits of social democracy in Europefocuses upon the role of external factors (Cerny 1995, Moses 1997). In

particular, the idea that globalization has »changed everything« has gaineda great deal of currency. Specifically, it is held by both academics and pol-iticians that external global constraints, capital account openness, in-creased trade dependence etc., have narrowed policy options for socialdemocratic governments to such an extent that left parties are no longerable to govern as left parties (Scharpf 1991, Blair and Schroeder 1998). In-stead, a new supply-side social democracy based around skill formation isseen as the only way forward for progressive politics (Giddens 1998).

Another development of note in contemporary Europe is the rise ofneo-populist movements and right-wing fringe parties, some of whichhave either gained power or have come close to doing so. Le Pen’s per-formance in the last French presidential elections, the emergence andconsolidation of Haider’s Freedom party in Austria; and the explosionand subsequent implosion of the Fortuyn list in Holland are but the mostobvious examples. Interestingly, these two seemingly discrete phenom-ena may have much in common.

Those European social democratic parties that regained power in the1990s have in many cases failed to produce traditional social democraticpolicies. Instead, with explicit reference to the external constraints of glo-balization, social democratic politicians have told their constituents thatthe policies of the past have no place in the present. Yet there is good. This»globalization« is nothing to be feared; rather, it should be embraced. Asa result, welfare reforms long associated with the right are actively pro-moted by social democrats while »job-security« has given way to the»life-long learning« needed to flexibilize labor markets and compete inthe global economy. Unfortunately, those most at risk in this new worldof global competition and flexible labor markets are those concentratedat the lower end of the income scale; and it is precisely among this partof the voting population, among the social democratic core, that we see

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Globalization and the Limits of Democratic ChoiceSocial Democracy and the Rise of Political Cartelization

MARK BLYTH

ipg 3/2003 Blyth, Globalization and the Limits of Democratic Choice 61

declining turnout and increasing voter volatility (Rodrik 1997, Hopkin2002).

A powerful explanation of how these phenomena are linked was givennearly sixty years ago by Karl Polanyi (Polanyi 1944). Looking at the nine-teenth century Polanyi argued that the attempt to delegate to the marketever greater areas of social responsibility engenders an intolerable uncer-tainty in the life of labor, particularly those most exposed to unemploy-ment and declining wages through competition. Moreover, as the marketexpands, the more fragile the social order as a whole becomes. As institu-tions of social protection are abandoned in the name of efficiency andcompetitiveness, so those most affected by market dislocations and un-certainties will turn to the state to protect them. This was Polanyi’s fa-mous »Great Transformation«. The reaction of labor to the vagaries ofmarket capitalism was to invent the state as protector (Polanyi 1944,Blyth 2002).

The embrace of a rhetoric of globalization by social democrats enabled them to survive the 1980s by cartelizing the policy space available to them. By doing so they successfully competed with the right and low-ered their own costs of defeat, but at the cost of narrowing the choices available to the electorate.

The parallel between Europe today and what Polanyi described isstriking. Similar to what we find today, governing parties in Europe inthe 1920s and 1930s told their constituents that »there was no alterna-tive«; that markets forces were a »fact« that demanded discipline and ad-justment, that we »cannot spend our way to prosperity«, and that asmuch as we would like to cushion the blow, in a world of open capitalflows and global markets, there is nothing government can really do. ButEuropean mass publics in the 1930s surprised their leaders by doingsomething unexpected. They flocked to those who said that they couldprotect them from the dislocations of the market. When their elected re-presentatives told them that they could not protect them, those constitu-ents went elsewhere, towards communism and fascism.

The nightmare scenario associated with this diagnosis is that Europestands poised to repeat its past – albeit without the communist alterna-tive. Like the 1920s and 1930s, the left is in power but governs with mar-ket-conforming economic policies. Like the 1920s and 1930s, labor is ex-


pected to adjust to the external financial balance through deflation sincewages are, once again, seen as a fixed cost rather than a source of demand.And like the 1920s, mainstream parties are loosing voters while populistsand extremists are gaining support across the continent in the midst ofeconomic hard times and mass unemployment.

There is much to commend this account. It takes the forces of globali-zation and populism seriously and joins them together in a »causal story«that is invoked by contemporary social democratic politicians; and intu-itively, it seems to fit the facts (Stone 1984). Yet, I want to suggest whysuch an explanation may in fact be flawed. First of all, if the claim that glo-balization has somehow »changed everything« is contestable, then it can-not follow that resurgent right-wing populism is a result of it. Second, ifthe much invoked logic of global constraints and the politics of necessityit demands are somewhat undermined by the available evidence, then wemust ask why European politicians, particularly social democrats, invokethese constraints and act »as if« they are as real and pressing as theirrhetoric maintains. Following this line of argument suggests an alterna-tive, or at least complimentary, rendition of the rise of European neo-populism and its relationship to social democracy. One where party poli-tics drive economic logics, and not the other way round.

How Tight are the (Global) »Ties that Bind«?

There are a huge number of possible »globalization effects« that havesupposedly rendered social democratic policies redundant. The basic»globalization has changed everything« thesis has the following struc-ture. The shift undertaken by developed economies to open capital ac-counts and floating exchange rates in the 1970s and 1980s combined withthe independent growth of capital mobility to produce a world where for-eign direct investment is an increasingly important source of growth(Helleiner 1994). Such capital is mobile however, and international inves-tors will exit economies with higher than the equilibrium rate of inflation(Przeworski and Wallerstein 1992). In order to avoid such dis-investmentand the attendant problems of devaluation and unemployment that itbrings, states must eschew fiscal and monetary policies that are either in-flationary or redistributive (Cerny 1995).

In such a »globalized« world traditional social democratic policy toolssuch as deficit financing become redundant, and states must deregulate


their product, labor, and financial markets to capture globally mobilecapital. Taxing locally, it is argued, no longer produces growth, justcapital flight.1 While there is certainly something in this account, we mustquestion to what extent such global constraints are truly constraining, forthere is a great deal of current research that suggests otherwise. Let us ex-amine a few core claims of the »globalization as constraint« thesis and afew objections to these claims.

First of all, many of the counterfactuals implicit in these claims do notstand up to scrutiny. If capital is now so globally mobile that deficits areout of the question, why is it that in the pre-globalization period (1950–1970) deficit financing was not actually practiced very much at all? In-deed, far from the popular picture of social democratic governments inthe post-war period constantly running deficits to promote an inflation-ary and unsustainable employment level, the fact is that most oecd coun-tries in this period did not run deficits. Even the poster children of neo-liberal reform, the uk and Sweden, do not fit this pattern. The uk’s firstpost-war deficit was recorded in 1975, while Sweden’s occurred in 1976(Callahan 2003, Blyth 2002). To what extent then are markets eager topunish behaviors that never took place? Indeed, why should contempo-rary social democracy be constrained by the lack of a policy option that itdid not exercize in the first place?

Second, arguments about trade competitiveness and its effects on bothgrowth and employment in Europe are overblown. Competitiveness isoften seen as an issue of cost reduction to remain in business (Prestovitz1994). Yet this is a shallow way of looking at the issue since many indus-tries trade on quality, not quantity. bmw, after all, has not been shut downby Kia. Similarly, arguments about trade substitution through importcompetition are often exaggerated. The four major East Asian newly in-dustrialized countries (South Korean, Taiwan, Hong Kong, and Singa-pore) accounted for less than six percent of world trade by 1990 (Wade1996 p. 69). How this can account for an average three-fold increase inunemployment across the whole of the developed world during the 1980sis far from clear.

Third, and particularly germane for the European context, if one takesEurope as a single unit rather than as individual competing countries,while trade between these countries has increased rapidly, trade between

1. Such policy statements have become commonplace among contemporary socialdemocratic leaders (Blair 1998, Brown 1998).


»single unit Europe« and the rest of the world has actually decreased.Europe, as a single market and single monetary unit, is turning inwardand de-globalizing its trade (Hay 2001). Given this, if Europe as a wholehas experienced higher than average unemployment and lower thanaverage growth, then the answer why may be similarly parochial. Onemay blame global competition for the loss of jobs, but the strict monetarystance of the European Central Bank and the deflationary effects of theMaastricht convergence criteria are arguably just as important in explain-ing patterns of growth and employment (Howell 2002).

Fourth, capital flight, the great constraint to be avoided, oftentimesdoes not occur as the theory outlined above would dictate. For example,in the run-up to the Swedish elections in 1994 several of Sweden’s largestfirms sponsored a newspaper advertisement that threatened a capitalstrike if the Swedish social democratic party (sap) was elected. Yet such athreat – as clear an example of a »capital mobility as constraint« argumentone could wish for – merely seemed to push up the sap’s vote. After theelection and the victory of the sap, none of the firms that made the threatactually left Sweden (Blyth 2002 pp. 235–6). Indeed, cross-national exam-ination of financial market behavior suggests that partisan compositionof a government matters little to market actors, and overall, the responseof financial markets to partisan policy shifts in advanced economies isquite mild most of the time (Mosely 2000). One could continue and dis-cuss how other global factors often identified as the limits to social de-mocracy are either similarly undermined by the evidence – for example,how tax rates have not »raced to the bottom«. Instead, let us now consideran alternative explanation where party politics drives policy imperatives,and not the other way about.

Parties and Political Change

Part of the problem in developing an alternative explanation of policychange as driven by party politics instead of external environmental shiftsis that most of the literature on political parties tends to see them as pas-sive creatures who respond to external changes but seldom initiate them(Blyth and Hopkin 2003). For example, the classic Lipset and Rokkanmodel of European political alignments saw parties as functional re-sponses to the demands of industrialism and nation building (Lipset andRokkan 1964). In such a world parties responded to external stimuli by


occupying the specific class locales opened up by external environmentalchanges. Parties react, they do not act to change the world around them.Such a »structural bias« is also seen in the way we think about the evolu-tion of political parties.

For example, Duverger’s classic interpretation of how elite-based cadreparties give way to mass parties of integration was undone by the fact thatmass parties stopped behaving as mass parties (Duverger 1954). As Kirch-heimer noted, in the changed context of the post-war welfare state, theintegration of party members gave way to the provision of public goodsfor constituents. Elite parties adopted mass party forms and began to actas »catch-all« coalitions that sought to supply ever-wider electorates withalternative baskets of public goods (Kirchheimer 1966). While this is cer-tainly a fair interpretation of the politics of this period, note once againhow in this treatment parties appear as passive creatures. The external en-vironment changes, and parties respond to those changes. Elites give wayto classes because of industrialism and demands for suffrage, while classesin turn give way to masses as industrialism turns into the equalitarianpost-war welfare states. Parties accommodate to the environment, theydo not shape it. Yet is this a satisfactory view of parties and what they do?

Parties are unique creatures in that they are simultaneously agents andstructures. They are institutions of democratic representation at the sametime as they are agents who seek to manipulate their environment in or-der to win elections. This side of the story – of parties as creative agents– has been much neglected in the literature on parties.2 Recently though,this has began to change. Colin Hay’s work is instructive in this regard.Rather than put parties in the passive, Hay focuses upon how parties canengage in one of two strategies: preference accommodation and prefer-ence shaping (Hay 1999). Preference accommodation occurs when par-ties take the world as given, and acting as vote-maximizers seek to capturethe median voter by offering different baskets of policies (Downs 1957).Parties thus compete in a policy space pre-determined by voters’ prefer-ences. In contrast to this model, Hay offers an alternative way of viewingthe relationship between parties and their environment.

For Hay, parties do not offer calculable policy outcomes. Rather theyprospectively offer voters policies that will supposedly bring about cer-tain »states of the world«. Thus an act of interpretation is required by thevoter (Mackie 2001). Voters do not »buy policies« so much as they accept

2. Except of course for the literature on political business cycles.


certain narratives of how, for example, tax cuts will increase investment,or how labor market flexibility will increase employment. Therefore, themedian voter’s position is not a structurally given fact that parties musttake as given. Rather, parties must engage in the politics of preferenceshaping in order to win elections; that is, actively shaping where the me-dian voter lies, and what content the median policy can have (Esping-Andersen 1985).

Two key changes have occurred that have effectively turned parties from vote maximizing competitors into risk averse colluders: the limits of catch-all politics, and the rhetoric of globalization.

Parties in Hay’s world shape their environment; they are agents morethan they are structures. Hence, if we wish to understand their policychoices and outputs, perhaps we should look for reasons internal to theiroperations and organizations, rather than simply accept the argumentthat external constraints determine their choices. This is not to deny ex-ternal constraints any role in limiting political choices. Clearly such a po-sition would be too extreme. Nonetheless, with the less than overwhelm-ing evidence in favor of the »globalization equals no alternative« narra-tive, we should take seriously approaches that see parties as agents of theirown destinies; destinies that may produce the very constraints we com-monly attribute to external causes.

The New Political Economy of Party Politics: Firms, Parties and Policy Choices

One promising avenue of research in this regard has been the notion ofthe cartel party (Katz and Mair 1995). Building upon Panebianco’s notionof the »electoral professional party« where changes in the technology ofelections and the life-cycles of politicians have combined to create a newparty form, Katz and Mair argue that political choices have effectively be-come cartelized. With the rise of electoral-professionalism, parties haveless need for members at the same time as the costs of being a party in-crease. As such, parties increasingly rely upon state subventions to sur-vive. These established parties also raise barriers to entry for smaller par-ties (thresholds etc.,) thus creating an insulated policy environment


among established elites. By cartelizing the political market in this waythe risks of failure are mitigated by insulating parties against catastrophicfailures at the polls through increased public funding and restrictedchoices. Such an approach offers a promising angle on thinking abouthow parties may themselves create their own constraints. However, in or-der to better specify a model of cartel politics, it is necessary to lay outwhat a cartel is in economic terms and what it is not. Only then can wesee how much explanatory leverage such theory can give us in the politicalrealm.

A cartel is a joint sales agency (Steigler 1964). The purpose of a cartelis to maximize joint profits of oligopolistic firms through the restrictionof competition. Firms are able to collude by varying either prices, quan-tities, or both. The rationale for joint sales maximization rather than com-petition is that the long-run average cost curve for an oligopolistic firmreaches its minimum point at a relatively large fraction of the size of thetotal market. Consequently, price competition between firms will notnecessarily drive any individual firm out of business. Being large enoughthat market price is not simply a structural fact presented to firms thatthey have to accept, firms’ price decisions are »strategically interdepend-ent« – they depend upon other firms’ choices. Market price can be set bythe firms themselves rather than being dictated by competition, so longas they cooperate, which is precisely the problem with cartels.

While joint maximization would be profitable, the individual first-bestchoice in such a situation is to defect and go for market share at the otherfirms’ expense.3 However, realizing this, all firms should then defect atthe first possible opportunity. As a consequence, cartels should be verydifficult to get started and very costly to maintain, and indeed, experienceshows that stable cartels, in the economy at least, are somewhat rare.There is however a possible solution to such stability problems.

Few things in life are a one-shot game. Iteration, multiple play, andthus learning by doing characterize most of social and economic life.Firms can learn from past defections how costly price wars can become,and in order to avoid such costs in future, firms may be willing to »followthe leader« to stabilize their market share. That is, one firm may act as theleader and others will follow. Stability can thereby occur without overtconspiracy. By announcing a price rise (or a quantity cut) this leading firm»tacitly signals« to the others their own revised outputs. In such circum-

3. Periodic airline fare wars are a good example of this type of behavior.


stances other firms follow the leader, thus limiting their own outputs andachieving higher long-run profits rather than what would be achieved bycompetition.

The costs of providing public goods began to exceed the capacity of states to provide them at the same time as the costs of running electoral campaigns increased beyond the capacity and willingness of the party members to foot the bill.

In order to understand why contemporary politics mimics cartel dy-namics we need to find political analogs for firms and for quantities. Firstof all, given that contemporary Western European party systems are oli-gopolistic in terms of numbers and market share, it is hardly a stretch tosee such a system as oligopolistic and major parties as the equivalent ofmajor firms (Taagapera and Shugart 1989, Gallagher, Laver, and Mair2001).4 However, establishing this fact alone does not make it a cartel. Tomake this further claim we need to find analogs for quantities. If we as-sume that, economically speaking, quantities represent outputs, and thatthe output of parties in government are policies, then we can further as-sume that policies are the functional equivalent of quantities.

If this is the case then the key question is how parties set policy quan-tities, that is, tacitly collude and thus cartelize the market for votes? In-deed, why would parties do this rather than compete? Contra the aboveclaims about the pressing necessity of global constraints, I argue that twokey changes have occurred that have effectively turned parties from votemaximizing competitors into risk averse colluders: the limits of catch-allpolitics, and the rhetoric of globalization. In turn, these changes havethemselves encouraged new adaptive strategies that have togethercartelized the party system, created cartel parties, and prompted the riseof right wing neo-populism.

4. During the 1980s, the effective number of parties in European parliaments exceededfive only in Finland (5.1), Italy (6.9), the Netherlands (5.1), Belgium (8.5), and Swit-zerland (5.8).


Why Cartelize? The Fiscal Limits of Catch-all Politics

For clarity of exposition, assume a party system that is dominated by twoparties that produce the catch-all policies typical of the post war era; fullemployment, public housing programs, and redistributionary taxation.Further assume that each catch-all party has attempted to maximizesupport through its expansion of such public and private goods pro-visions. Logically, if both parties pursue the same strategy, then voterswill become increasingly indifferent to party choice. If we further assumethat voters would prefer more public goods to less, but also assume thatthere is a defined fiscal limit beyond which such provisions cannot bemade without creating a fiscal crisis, then the catch-all strategy runs intoa structural limit that may be both welfare decreasing and election loos-ing.5

Two consequences follow from this. First, the space for policy compe-tition is effectively reduced. States cannot squeeze any more resources outof their societies for the production of public goods without harminggrowth itself. Consequently, policy competition, in terms of providingmore and more public goods in order to win elections becomes less fea-sible. Second, at the same time as reaching such fiscal limits, as manystates arguably did in the late 1970s and early 1980s, two further problemsarose that finished off catch-all politics: the technologies and costs of elec-tions changed while party members actually became less relevant for theproblem of winning elections.

First, the technology of elections moved away from mass participationto media marketing. Union blocs became less valuable than such thingsas newspaper endorsements, television time, and large private donations.Thus the costs of providing public goods began to exceed the capacity ofstates to provide them at the same time as the costs of running electoralcampaigns increased beyond the capacity and willingness of the partymembers to foot the bill. Second, the risks to both individual politiciansand parties increased pari passu with these costs. By the 1980s the days ofpolitics as a gentlemanly vocation were over for major Western Europeanpolitical parties (Panebianco 1979). Parties were composed of permanentrepresentatives whose livelihoods depended upon election and largebureaucracies that depended upon stable counter-cyclical funding. Thus,

5. In that the costs of producing such provisions (lost growth, sluggish investmentetc.) exceed the benefits they produce.


on a systemic level, catch-all politics reached its fiscal limits as a strategythat would promote party success and stability. Meanwhile, on a moremicro level, the catch-all party form, with its dependence upon massmemberships and steady voting blocs, became a less reliable organiza-tional form in the face of rising costs, declining turnout, increasing vola-tility, and the declining utility of members.

This squeeze was particularly problematic for social democratic par-ties. While parties of the right had never been too comfortable with everwidening public goods provisions, using the public purse for the publicpurpose was what social democracy was all about. Caught in the doublesqueeze of diminishing returns to catch-all policies and a dysfunctionalorganizational form, social democrats throughout the 1980s sought towin elections by contesting the policies of the right. Specifically, fightingunemployment was the key issue that the left focused upon during thisperiod. However, after 1975 governments of all complexions effectivelyreduced the reservation wage by increasing, or at least allowing the in-crease of, unemployment. Thus an individual risk traditionally compen-sated for by the presence of full employment gave way to a new marketdiscipline (Kalecki 1944, Shapiro and Stiglitz 1984, Korpi 2002). Conse-quently, voters could state their public preference against unemploymentin survey after survey during the 1980s and then vote against those pref-erences at election time, much to the chagrin of social democrats.6

As the cartel thesis would dictate, competition was not working for theleft. Perhaps then, collusion would? Driven by organizational survivalmore than by conviction, left parties began to not compete on the issue ofunemployment. Inflation was similarly declared the number one enemyabove unemployment after forty years of holding the opposite. Monetarypolicy was »depoliticized« and handed to »independent« experts, andthose who would benefit least from such changes, social democraticvoters, were neglected as left parties sought to target professionals andmiddle income groups. After all, if members were no longer financiallyuseful, did not vote anyway, and if they pushed the party in »extreme« di-rections, why appeal to them? However, abandoning policy in the face ofelectoral expedience is one thing, justifying it is another, and this is wherethe logic of global constraints becomes compelling; but not in the formcommonly presented. Cartelization may make sense for the party in termsof a survival strategy, but to win elections by not competing over tradi-

6. See Eurobarometer, any year 1980–1990.


tional areas needs a whole new rationale. Luckily, such a rationale was athand.

How to Cartelize? The Rhetoric of Globalization

The social democratic parties that produced social democratic outputswere creatures of the Keynesian era. Governing parties of the left and theright were assumed to have primary responsibility for ensuring jobs andgrowth, and were also assumed to be able to marshal fiscal instrumentsto those ends. Unfortunately for the practice of catch-all politics, but for-tunate for a new generation of social democrats concerned with the verysurvival of their parties, a reformation in the way policymakers and theireconomic advisors thought about the economy occurred over the sameperiod. This was the new logic of global constraints.

In contrast to Keynesian era policy making, which assumed that »peo-ple had no knowledge of the economic system and did not perceive anyinterrelationships between the (hypothesized) variables«, economicpolicy-making in the 1980s became increasingly dominated by new theo-ries such as rational expectations, which argued that people do indeed in-vest in being correct – to the point that »economic agents are assumed[to be] completely aware of the ›true‹ structure of the economy … andmake full use of this in forming their expectations« (Bleaney 1985 p. 142,143). The consequences of such an ideational shift are dramatic, for itargued that while we can expect individual market participants to makemistakes, systematic mistakes by markets are impossible.

If the point of social democracy was to correct for market failures, what was the point of social democracy in a world were markets did not fail?

If one further assumes that »[deregulated] financial assets embody thetrue value of their real counterparts, creating an environment in which in-dividuals trading in these assets can make Pareto efficient decisions« thenit is hard to avoid the conclusion that free and integrated markets willyield superior economic performance to regulated markets with employ-ment and output being produced up to the »natural rate« possible. This»neo-liberal« worldview »present[s] a picture of economic efficiency be-ing dependent upon free markets for goods, labor, and finance, and a


minimalist state. Market liberalization is accordingly beneficial because itinvolves the removal of market distortions, which are by definition ineffi-cient« (Eatwell 1996 p. 10).

In such a world, social democratic catch-all parties and their attendantpolicies become counter-productive. For if they accept this logic, thenany intervention into the market, whether done for the private interest ofelection or for the public interest of boosting the economy with the pub-lic good of growth, can only end in disaster. If the point of social demo-cracy was to correct for market failures, what was the point of socialdemocracy in a world were markets did not fail? The attraction of sucharguments as a way of eschewing policy commitments, arguments prof-fered with such gusto by contemporary social democratic leaders, is notdifficult to see. These new ideas, so antithetical to traditional social dem-ocratic objectives, combined with the very pressing electoral and financialconstraints social democratic parties faced during the 1980s to producetwo new survival strategies: a downsizing of constituent expectations andan externalization of policy commitments. The end result of which wasto »reform« social democracy back into power; or more appropriately, tocartelize it.

Cartelizing the Party System: The Discourse of Downsizing Expectations

The first survival strategy was to downsize voters’ expectations since so-cial democratic parties had an interest in reducing the policy commit-ments that had overextended them in the first place. Once the limits ofcatch-all politics were reached, social democratic party elites quite instru-mentally embraced the new ideas about the economy detailed above as away of ratcheting down constituent expectations. In cartel terms, theywere signaling other parties that they were limiting quantities (policies)and encouraging joint maximization (stability of tenure). Consequently,if other parties did the same, they could cartelize the market and get moreprofit (hold on office) and security (minimal cost of electoral defeat) forless (lower policy commitments.) How then does one ratchet down ex-pectations?

The first way, particularly apparent in the uk, the us, Sweden, and in-creasingly Germany today, was discursive. Social democratic parties pro-claimed their devotion to the free market and the global economy, despite


all its draw-backs for their traditional constituencies. They did this be-cause they had discovered a »third way« or »neue Mitte«, which held thatstates should not produce the public goods they had in the past becausethe market could do it better. Whether the market could in fact do it bet-ter was a moot point. What was important was that the deployment ofsuch a discursive strategy got parties »off the hook« for the productionof such goods in the first place. Thus, in order to survive in a post-catch-all environment the rhetoric of globalization and various »third ways«were employed by social democrats throughout Europe (Hay and Rosa-mond 2002).

Cartelizing the Party System: The Externalization of Policy Commitments

Having achieved power by encroaching on traditionally right-wing pol-icy areas, parties could signal their resolve to each other by creating insti-tutional fixes to the problem of policy commitment. This would lock inexpectation reduction and thereby signal a credible commitment to thecartelization of the political market as a whole. The logic of central bankindependence illustrates this nicely. According to the new ideas devel-oped to justify state rollback, politicians – through their overproductionof public goods – tended to mesh the electoral cycle to the business cyclein order to get reelected (Nordhaus 1975, Hibbs 1976). Consequently, theequilibrium rate of inflation was always going to be higher than what itwould be absent such political »interference«. Since the electoral cyclewas a recurrent fact, although politicians may proclaim that they will re-duce inflation once they are in office, they cannot actually do so in prac-tice because their inflation preferences are said to be »time inconsistent«.Given this, politicians should not be given the instruments to reflate theeconomy in the first place. The best way of assuring this was then to de-volve monetary policy to unelected central bankers with long time hori-zons. Only such a group would have preferences that would produce lowinflation and thus safeguard growth (Kykland and Prescott 1977, Persson1988).

Such policy externalizations and exercises in downsizing expectationshave been embraced by social democratic parties across Europe as the op-timal solution to the multiple dilemmas they face. By devolving policy toothers who are not directly responsible to their electorate at the same time


as discursively ratcheting down expectations, parties of all complexionsare able to institutionally fix policy quantities and qualities regardless ofwho is in office. By doing so major parties can cartelize the market forvotes by reducing the policy space over which parties can conceivablycompete. Seen in this way, such institutional fixes are the equivalent ofbinding quotas on policy production.

Having an independent central bank means that politicians are nolonger responsible for either creating or managing economic outcomes.As such, they cannot be held accountable for their effects. Policy external-ization to other »independent« institutions, such as the eu and the wto,further insulates politicians from voters’ preferences and effectively trun-cates the possible supply curve of policy. Deploying such strategies in anuncertain electoral environment effectively insulates elites from claims bytheir constituents. Responsibility for monetary policy is given to centralbankers, responsibility for employment is devolved to regional parlia-ments, welfare provision is given over to private institutions and non-governmental organizations, while public investment is awarded to»public-private initiatives«. Rather than maximizing votes as competi-tors, social democratic politicians may have discovered that governingless may be less risky than promising more.

Where then do we see such dynamics? The preceding section suggeststhat we should see policy convergence among oligopolistic parties com-ing from two angles: from the deployment of policy rhetorics designedto downsize expectations and from the increasing institutional externali-zation of policy commitments. Examples would include the privatizationof welfare services, the independence (from elected officials) of centralbanks, and the transfer of responsibilities, either upward to supra-national institutions or downward and outward to devolved assembliesand the private sector. In this final section we examine these hypotheseswith regard to two polar cases: the most liberal of European states, theuk, and arguably the most social democratic, Sweden.

Cartelization in the United Kingdom

Catch-all behavior was typical of British politics in the 1960s with the gen-eral acceptance of the welfare state and Keynesian economics that cameto be known as »Butskillism«. This development was short-circuited,however, in the late 1970s by both parties’ inability to deliver sufficient


material benefits. This culminated in the Conservative’s defeat at thehands of the Miners Union in 1974 and Labour’s fabled »winter of dis-content« and defeat in the 1979 general election. These events led initiallyto the victory of the so-called »hard left« within the Labour party and ex-tended electoral defeat. Being faced with an unelectable opponent andunpopular policies, the Conservative Party had no incentive to behavelike an oligopolist and behaved as a policy monopolist, effectively closingLabour out of the market. Given this, the last twenty years of British partypolitics has been the story of the Labour Party’s attempt to reestablish itsposition within a cartel, and in order to do so it had to create an oligopolyout of a monopoly.

By 1992, the Labour leader Neil Kinnock had reestablished some con-trol over the party manifesto, and after loosing two elections the party be-gan to drop many of its traditional commitments. Internally, in 1993 theLabour party adopted the one-man one-vote principle for choosing bothparliamentary candidates and members of the national executive, thuseliminating the unions’ block vote. Under Tony Blair, this process hasgone much farther. »New« Labour has actively courted and successfullysolicited funds from business groups, while strongly signaling that thetrade unions no longer have any special relationship with the party.

Evidence of the strategy of discursively downsizing expectations andtruncating the policy space is famously indicated in the joint statement byTony Blair and Gerhard Schroeder entitled »Europe: The Third Way/DieNeue Mitte«. Instead of catch-all inspired analyses of social problems, thedocument embraces the »globalization as constraint« arguments notedabove. It explicitly (and without any evidence) declares that »corporatetax cuts raise profitability and strengthen the incentives to invest … Ithelps create a virtuous circle of growth …«; »the taxation of companiesshould be simplified and corporation tax rates cut«; »companies must …not be gagged by rules and regulations«, all of which signals a carteliza-tion of the space for possible policy competition. Regardless of the truthor virtue of such policy statements, they are hardly what one traditionallywould have associated with the European Left. However, what this doesshow is how commitments and expectations have been downsized andhow the possible space for policy competition has been reduced.

We also see clear evidence of the externalization of policy commit-ments in the British case. In May 1997, the new Labour Government gavethe Bank of England effective independence to set interest rates, subjectonly to the advice of an eight member Monetary Policy Committee ap-


pointed by the government. This major shedding of economic responsi-bility by the government was not even mentioned in the party’s electionmanifesto. Meanwhile, the deepening of the European Union, in partic-ular the commitment to join emu in the near future, represents a furtherexternalization of policy commitments as the government’s obligation totake responsibility for economic policy can instead be blamed on the Eu-ropean Central Bank. Similarly, the institution of a Scottish parliamentand a directly elected executive mayor for London allow the central gov-ernment to shift responsibility for outcomes in these arenas as well. Whilethese changes are usually interpreted as New Labour simply adjusting tothe »new realities«, it is perhaps more accurate to recall that the globalconstraints often appealed to are rather underwhelmed by the evidence.Such policies are thus more accurately seen as a survival strategy than astructural fait accompli.

Cartelization in Sweden

In contrast to the perceived end of catch-all politics elsewhere during the1970s, the Swedish Social Democrats (sap) attempted a reflationary strat-egy called the »third way« upon returning to power in the early 1980s.The third way was a large devaluation aimed at giving Sweden a one-timeterms-of-trade boost in exports. In this regard it was quite successful withSwedish economic performance throughout the early to mid 1980s beingfar superior in terms of employment and output than those pursued inthe uk (Bosworth and Rivlin 1985).

Despite the good economic news, Swedish business groups were farfrom happy. Still hurting after the so-called Wage Earners Funds debaclein the mid 1970s where the sap and the blue-collar trade union confeder-ation (lo) attempted a leveraged buy-out of Swedish capital with theirown funds, Swedish business went on an ideological counter-offensive(Steinmo 1988, Pestoff 1991, Blyth 2001). The Swedish Employers Feder-ation (saf) spent heavily, reinvigorating pro-market think tanks and in-fluencing the public debate through lavish campaigns (Pestoff 1993, Blyth2001). Simultaneously, the Swedish economics profession, which wasstrongly integrated into policy-making, underwent the same neo-classicalreformation that had already occurred in the us and the uk (Blyth 2002).The effect of which was the transformation of the ideational contextwithin which policy was made, a transformation that facilitated the


eschewing of traditional areas of responsibility that Swedish business andits parliamentary allies were now no longer willing to accept.

The Swedish finance ministry of the 1980s was an important receptaclefor these new ideas about the costs of welfare institutions on growth, theneed for »competitiveness« in the »new global economy«, and the costsof high taxation and capital controls. Tax reform and financial deregula-tion became a crusade within the sap’s finance ministry. Unfortunately,the tax reform enacted in the late 1980s was under-funded and financialderegulation took place with external capital controls in place. Taken to-gether this merely succeeded in creating a real estate bubble which, whenit burst, increased unemployment to twelve percent – its highest levelsince the 1930s. Unsurprisingly, the sap lost the election and the Conserv-atives came to power for the first time in forty years – and here the storygets interesting.

Given the influence of these new ideas on both the sap and the newlyempowered Conservatives, the Conservatives engineered a deflation afterthe real estate bubble burst which turned the deflation into a general col-lapse of economic activity (Blyth 2002). However, rather than capitaliz-ing upon this error, the sap took this as evidence that, in the words of thehead of the Swedish Employers Federation, »after a long illness, theSwedish Model is dead«, and upon returning to power the sap carried onwith the same restricted and market-conforming set of policies.7

Indeed, by the 1998 elections both major parties’ policy proposals hadconverged to the point where neo-liberal restructuring was very much theonly choice on the menu. In terms of policy choices, both parties targetedinflation fighting over employment creation while sick pay and other wel-fare benefits were reduced. Moreover, policy externalization proceededapace. Sweden joined the eu in the early 1990s in order, as the then Con-servative prime minister put it, to make »tax cuts (and hence welfare re-ductions) more or less inevitable«.8 Similarly, the Swedish central bankwas made independent in the same period and the traditionally close re-lationship between sap and lo became increasingly distant during the1990s.

Here we see the same dynamics in Sweden as we saw in the uk. Swe-den shows evidence of downsizing expectations, the externalization of

7. Ulf Laurin, quoted in SAF Tiden, 16 February 1990. 8. Carl Bildt. Quoted in P. Kurzer, Business and Banking: Political Change and Economic

Integration in Western Europe (Ithaca: Cornell University Press 1993).


policy commitments, the truncation of the policy supply curve, and thecartelization of the system. All conditions receive partial confirmation inthe Swedish case. Partial in the sense that since the late 1980s the firstthree have occurred, but the fourth has not. The reasons for which tellsus a great deal about the limits of cartelized systems.

Populist parties can ignore what the cartel parties take to be reality and raise issues that the cartel parties have attempted to bury in their efforts to truncate the policy space. They may promise to deliver levels of public service that are deemed impossible by the cartel parties, secure in the knowledge that they will not be called upon to deliver on those promises.

Despite the sap and the Conservatives insisting that »there was noother way« and that policy convergence to a neo-liberal agenda of di-minished expectations and reduced commitments was the only choice onthe menu, the Swedish public forgot to listen. The presentation of acartelized set of policies by the two major parties in the 1998 elections re-sulted in a drop of support for the governing sap from 45.4 percent ofthe vote in 1994 to 36.5 percent. However, this was not translated intosupport for the Conservatives as their share of the vote also plummeted,thus allowing the sap to remain in office as a minority government, butonly with the support of the Left Party – which gained 5.8 percent overtheir 1994 showing.

In sum, cartelization as a survival strategy reached its limits in that de-spite both parties’ cartelized policy agendas, the sap was forced by a pop-ular demand for »restoration« of the welfare state to promise moremoney for health care and social services. As the New York Times noted,»the most repeated claim in this election was not the dynamic pledge tobring about change common to campaigns elsewhere in Europe but asolid promise to restore what was«.9 Substitutes, in the form of theGreens and the former Communists allowed the Swedish public to exitthe cartel and signal that while there may be only one choice on the menu,they may be prepared to eat elsewhere, thus exposing the limits of anycartelization strategy. And this is where an alternative account of the link

9. Warren Hoge, »Swedish Party Pledging Expanded Welfare Gains Slim Victory«New York Times, 21 September 1998.


between social democracy, globalization and neo-populism can be recon-structed.

Conclusion: Populism and the Limits to Cartelization

This paper has argued the following. The logic of global constraints ofteninvoked to explain the anemic nature of contemporary social democracymay be less constraining than is often claimed. If this is the case, then therise of right-wing neo-populism as a reaction to globalization, under-stood as a series of structural imperatives, may not be so clear-cut. How-ever, what is important is that social democrats either do believe thatthese constraints are real, or as suggested above, have embraced suchideas as a way of downsizing expectations, externalizing policy commit-ments, and freeing policy-makers from the constituents’ demands as asurvival strategy. The embrace of a rhetoric of globalization by socialdemocrats enabled them to survive the 1980s by cartelizing the policyspace available to them. By doing so they successfully competed with theright and lowered their own costs of defeat, but at the cost of narrowingthe choices available to the electorate. The result was to lower turnoutand turn away from their core constituents. Such strategies of discursiveconstruction, institutional binding, and policy externalization may makethe cartel of parties who do not really compete more secure, since theyeffectively compete over less, but such a strategy is immensely costly inthe longer term.

Cartels face two threats. One is defection by members seeking short-run advantage at the expense of their colleagues. This paper has arguedwhy such defections are unlikely. The other threat to a cartel comes fromthe availability of substitutes, that is, outsiders. Populist parties can ig-nore what the cartel parties take to be reality and raise issues that the cartelparties have attempted to bury in their efforts to truncate the policy space.They may, for example, promise to deliver levels of public service that aredeemed impossible by the cartel parties, secure in the knowledge thatthey will not be called upon to deliver on those promises. Or they mayattack the cartel itself as a conspiracy against the public on the part of self-serving political parties. Indeed, such appeals are increasingly commonfeatures of European politics. Regardless of the strategy employed, car-tels invite challengers. And if the cartel parties in their efforts to securethemselves from failure tell their traditional constituents that there really


is no alternative, then those constituents may well turn to those who dooffer alternatives. This is, of course, what also happened in Sweden in1998, where in addition to the Left Party, the other big winner was theKristdemokraterna, which gained 7.8 percent over 1994.

What if a populist party achieves power and actually does want to change things? Riding on the back of mass discontent such a party may well prove the weakness of the global ties that bind, in a way reminis-cent of the last time Europe refused to give its mass publics any real al-ternatives.

As populist parties increase in strength, cartel parties have twooptions. One is to try to co-opt these parties into the cartel. One couldcertainly argue that this was what was attempted in Italy during the so-called period of national solidarity, is perhaps what has been happeningwith the Greens in Germany since 1998, and has certainly been the re-sponse of the Austrian cartel to Haider’s Freedom Party. Indeed, such ex-amples may well show that populists do not really want to change all thatmuch. Rather, they simply want to be part of the cartel themselves.

Another possibility exists however – continued exclusion. But this islikely only to reinforce the perception of a lack of choice or a political con-spiracy, and continue the decline both of the vote received by the majorparties and the decline of electoral turnout that has been observedthroughout the industrial democracies. Such outcomes paint a gloomyprospect for liberal electoral democracy, let alone social democracy, withits legitimacy sapped by a lack of choice leading to declining interest andincreasing cynicism. But to bank on continued exclusion is risky in an-other way. For what if a populist party that contests these external con-straints achieves power and actually does want to change things? Ridingon the back of mass discontent such a party may well prove the weaknessof the global ties that bind, but in a way far more reminiscent of the lasttime Europe refused to give its mass publics any real alternatives. Thismay be the real cost of saying »globalization made us do it«.


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